March 15, 2010

Ignorance or Fraud?

...Or maybe both since "sin [such as greed] makes you stupid." On 60 Minutes, Michael Lewis says ignorance:
Asked how many people he thinks were in the world who understood what was going on, Lewis told Kroft, "Between 10 and 20 investors at most and this is from the universe of tens of thousands of people who could have conceivably made that bet."

"Wall Street is able to delude itself because it's paid to delude itself. I mean one of the lessons of this story is that people see what they're incentivized to see. If you pay someone not to see the truth, they will not see the truth. And, Wall Street organized itself so people were paid to see something other than the truth. And that's one of the central messages of this story. You have to be very careful how you incentivize people, 'cause they will respond to the incentives," Lewis explained... "They insured tens of billions of dollars of subprime mortgage loans without even knowing they were doing it," Lewis said.


Lewis thinks the fiasco had more to do with Wall Street stupidity than corruption.

He said Wall Street didn't understand these things "well enough."
Another Wall Street scribe says that fraud was the cause:
Michael had it wrong in more than one profound way. The markets weren't just "mispricing risk," those in-the-know were manipulating prices--covering up malfeasance and losses. Meanwhile, some members of the fourth estate used their pernicious pens as pawns in the cover-up.

All of the legacy investment banks enabled predatory lending, yet they now perpetrate what Elizabeth Warren calls the "myth of the immoral debtor." Wall Street banks were the key architects of the financial meltdown. The Fed provided cheap money, but irresponsible financiers exploited it. Banks massively over-borrowed, their agents extracted billions in bonuses, and now they blame hard-working taxpayers.


Michael told 60 Minutes (March 14) the financial crisis is a story of mass delusion, but he's only deluding himself. It takes courage to tell the real story. This is actually a story of Wall Street's massive, wide-spread, multi-year fraud, including accounting fraud.

I appeared on 60 Minutes (February 14) and said Wall Street's dealings with mortgage lenders, securitizations, derivatives, and investors were a massive Ponzi scheme, the biggest crime ever against the American economy. Wall Street and Washington hope you are gullible enough to believe otherwise.
It's entirely plausible that executives at the banks knew little about what they were getting into. But if the argument is framed as to why there weren't more people shorting the sub-prime market, Tavakoli provides an explanation given that if massive accounting fraud is taking place then shorting is risky since you couldn't know how long the fraud would last.

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